Economist Predicts Economic Expansion By Early Summer
GRAND RAPIDS — Let’s be honest about it. The United States is in a recession.
But it will be a shallow, short-lived recession, and the country will likely see economic expansion again by early summer next year.
That’s the message Stuart Varney, a nationally known economist, journalist and co-host of CNN’s MoneyLine News Hour, brought to members of the business community gathered at the Grand Center Wednesday for Fifth Third Bank’s Business Outlook Luncheon.
Varney believes the U.S. economy is now in a recession due to the confluence of three unique financial events: the burst of the Nasdaq technologies bubble, the extraordinary pace of globalization in the 1990s, and the events of Sept. 11.
Backtracking to the roots of the U.S.’s current economic woes, Varney said that in the mid-1990s Americans suddenly started to realize how good they had it.
Unemployment had dropped below 5 percent. For the 91/2 years up to the spring of 2000, U.S. businesses were creating an average of 230,000 new jobs a year. Last spring, over a period of five months, America created 1 million new jobs, which Varney described as a “stunning” feat. By comparison, it has taken Western Europe, with its population of 385 million, five years to create 1 million new jobs.
That dynamic growth was coupled with lower inflation and lower interest rates, Varney observed. By the mid-1990s, American companies were beginning to dominate all the key industries and technologies, with the exception of banking, Varney said.
Computing, in particular, has been and continues to be an all-American industry. The top five computer firms are American, as are the top software companies.
Then came the tech stock frenzy after Netscape went public in August of 1995. On the first day of release of Netscape shares the stock price “doubled, then it tripled, then it doubled and tripled again,” Varney said, and the value of American technology stocks skyrocketed. That was the beginning of the tech stock bubble, and the beginning of “whopping” overvaluation.
Web Van, for example, was able to secure $1 billion in capital for a totally unproven, untried business model. A company called JDS Uniphase never made a dime in 12 years of business but was still valued at $110 billion.
When the bubble burst, the Nasdaq went from 5,100 to 1,300 and wiped out $4 trillion worth of wealth.
“That was a unique financial event,” Varney said. “We’re never seen a bubble of that magnitude or that enormity before and we’re living with that unique event to this day. That’s part of the reason we have a recession today and it’s also the reason why investor confidence is shot.”
The second unique financial event was globalization, which proceeded at an extraordinary pace in the 1990s, interlocking economies, companies and markets. The volume of world trade doubled during the decade, with $159 billion in capital flowing across boarders in 1991 then jumping to a flow of $143 trillion in 2000, Varney pointed out.
Globalization is a wonderful thing on the way up, because the capital momentum creates jobs, buildings and factories. But on the way down capital dries up and momentum swings to the downside, he said.
“Across boarder capital funds last year were $1.3 trillion; this year they’re no more than $700 billion — almost cut in half.”
The third unique financial event was the profound affect of the Sept. 11 terrorist attacks, which Varney said signaled the dawn of a new day in U.S. business, culture and politics. For some, business came to a standstill and for others it slowed down dramatically. That will show up in GDP figures.
On the downside, there is record consumer dept in the U.S.; industrial production since Sept. 11 is down 4 percent — the 12th drop in a row; output is down 5.8 percent for the last 12 months; retails sales were down 2.4 percent in September; and capacity utilization is down 75 percent to its lowest level since 1983.
On the upside, there is enormous fiscal stimulus in the way of nine interest rate cuts this year; this year’s tax rebates and those to come; and a speeded up tax rate cut, which means paychecks will be larger next year.
Varney added that the price of oil is down nearly $10 a barrel since Sept. 11 and when that basic commodity goes down in price it puts more disposable income into the economy.
Now it’s a question of confidence.
Can consumer, investor and business confidence in the economy be restored? That will depend heavily on the country’s military success in the Middle East and on its political leadership.
“This is not a normal time in America. Things have changed. It’s a very somber time, a different time. It’s a time when we need to get our resolve together.”
The country is going to come out of this slump, but Varney doesn’t think it will be a V-shaped recession. Rather, he thinks the economy is near the bottom now and that’s where it’s going to stay “until confidence of all kinds is restored.” He predicts the start of a rebound in early summer 2002.
“We have about 5 or 6 bad months still to go where economic news will be negative,” he projected. “After that, a very small expansion in the economy and we’ll be moving back up again.”
Varney joined CNN in 1980, the same year it was founded. He is a founding member of CNN’s business team and former host of both Business Day and Business Asia. He’s an economist educated at the London School of Economics. He was awarded the Peabody Award for excellence in journalism for his coverage and analyses of the stock market crash of 1987.